Tax Progressivity and Top Incomes: Evidence from Tax Reforms

We study the link between tax progressivity and top income shares. Using variation from large-scale Western tax reforms in the 1980s and 1990s and the novel synthetic control method, we find large and lasting boosting impacts on top income shares from the progressivity reductions. Effects are largest in the very top groups while earners in the bottom half of the top decile were almost unaffected by the reforms. Cuts in top marginal tax rates account for most of this outcome whereas reduced overall progressivity contributed less. Searching for mechanisms, real income responses as measured by growth in aggregate GDP per capita, registered patents and tax revenues were unaffected by the reforms. By contrast, tax avoidance behavior related to the management of capital incomes in the very income top appears to lie behind the observed effects.

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Andreas Bergh, IFN and Lund University, is one of the authors of this book. The Timbro Sharing Economy Index is the first global index of the sharing economy. The index has been compiled using traffic volume data and scraped data, and provides a unique insight into the driving factors behind the peer-to-peer economy.